Difference Between Dividend Yield and Distribution Yield (With Table)

As more and more people begin to dabble in their share of investing, it is imperative to distinguish ways in which one can know more about the value of their investment. Both Dividend yield and distribution yield serve as insightful metrics for such a cash flow. What differs is the period involved and the type of return. They are both considered useful options for sustainable investment income growth.

Dividend Yield vs Distribution Yield

The difference between dividend yield and distribution yield is that they are expressed as ratios of different types of returns. The dividend yield is expressed as a ratio of dividends over a financial year to the company’s current share price. Distribution yield is expressed as a ratio of annual distribution to the fund’s value at the time. Dividend yield and distribution yield both are expressed as a percentage of a company’s market value.

The dividend yield is a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its current stock price. Before getting into what counts as a dividend yield, it is important to note what a dividend is. A dividend is a portion of an organization/company’s earnings that is distributed amongst its shareholders. This amount largely depends on internal decisions taken by the organization’s board of directors. They serve as a reward to a venture’s investors.

The distribution yield is determined by your returns through an exchange-traded fund (ETF). As opposed to dividend yield, it is not calculated by aggregating the returns over a certain period but rather is determined by considering the past month’s return. In this, the most recent distribution is taken into consideration. This distribution is then extrapolated for the annum (i.e., multiplied by 12). The resultant value is then divided by the Net Asset Value (NAV) of the said fund at the time of purchase. This is done with ETFs. ETFs are the type of funds that are put together to track either a single commodity or a selection of commodities, sectors, and the like.

Comparison Table Between Dividend Yield and Distribution Yield

Parameters of ComparisonDividend YieldDistribution Yield
Metric of ComparisonPrice per shareNet Asset Value (NAV)
Time periodUsually 12 months i.e., over the period of a yearUsually the most recent month (1 month)
Employed byCompanies/OrganisationsFund or a trust
CalculationDividend Yield = Aggregate of annual dividends per share / price per shareDistribution Yield = (30-day distribution amount x 12) / end of month NAV
Paying OutPaid in the form of dividend checks or additional stock usually on a quarterly basis. Paid either electronically or by check. Usually, dividends are paid out quarterly, capital gains are paid out annually

What is Dividend Yield?

Dividend yield allows for value realization through both stock price appreciation and company payouts. Given that dividend yield is determined based on the annual dividends, they are also generally considered less risky than other forms of investment. Regardless, it is important to not base one’s investment plans solely on a company’s dividends.

For instance, if a company pays 5 rupees of dividends over 12 months and has a current share price of 100 rupees, then the resulting dividend yield would be 5%. In addition, payment of dividends is not considered a mandatory practice for any organisation in the investment world.

Therefore, there is a possibility for the organization in question to discontinue paying dividends. Hence, it is important as an investor to not put one’s eggs in the same basket and in one that has the highest dividend payout alone at that.

What is Distribution Yield?

In the case of distribution yield, the most recent distribution is taken into consideration. This may prove risky at times since the value banks on one month’s (the most recent) distributions are in turn annualized. This leaves room for projections that can be skewed as minute financial give and take is not captured. This is attributed to the time period taken into account in the calculation. It is possible that special dividends, when not properly accounted for, may reflect a higher distribution yield.

Although distribution yield typically looks at the most recent distribution, a company can choose to look at the past 12 months’ distribution at their discretion. They are employed while gauging the cash flow through an investment vehicle as opposed to an organization. 

Suppose a fund is priced at 100 rupees per share, and 50 paise is the outlined interest payment that is collected during a month. The interest is then multiplied by 12 for an annualized total of 6 rupees. Dividing 6 rupees by 100 rupees will give us a distribution yield of 6%.

Main Differences Between Dividend Yield and Distribution Yield

  1. Dividend-paying stocks make room for investors to profit through both stock price value appreciation and payouts made by the company. However, distribution yield is based primarily on cash flow.
  2. Dividend yield serves as a useful tool for clear comparison indicators between two potential companies; however, distribution yield serves as a useful tool to measure a company’s past performance against its current.
  3. The dividend yield is reflective of value in terms of dividends alone, whereas distribution yield is inclusive of capital gains/losses
  4. The dividend yield is a preferred metric by companies/organization, whereas distribution yield is employed as a metric for an investment vehicle like ETF
  5. The return of capital, i.e., capital gains in a distribution yield calculation, is not taxed as opposed to a dividend yield that is entirely taxed.

Conclusion

Both distribution yield and dividend yield come with their own set of pros and cons when it comes to measuring the value of your investment. However, what is noteworthy here is that they are both reliant on past performance alone, and neither is any indicator or projection of how a stock/fund will go on to perform in the near future. This must always be kept in mind while comparing different yields by different trusts/organizations.

References

  1. https://sci-hub.se/https://www.sciencedirect.com/science/article/pii/S0304405X97000020
  2. https://sci-hub.se/https://www.sciencedirect.com/science/article/pii/0304405X74900063
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